Impairment Calculator
for Banking & Finance

IAS 36 impairment testing for Banking & Finance

Banks and financial institutions face a particular tension in IAS 36 testing. Most financial assets fall under IFRS 9 and its expected credit loss model, which means they sit outside IAS 36's scope (IAS 36.2(e) excludes financial assets within IFRS 9's scope). But goodwill from banking M&A, branch network assets, core banking IT platforms, and other non-financial assets remain firmly within IAS 36. A mid-market bank that acquired a regional competitor five years ago might carry EUR 25M to EUR 100M of goodwill and EUR 15M of capitalised IT costs. Testing those assets requires a VIU model built on the bank's projected net interest income and fee income, stripped of the lending book's credit risk (which IFRS 9 already addresses separately).

CGU definition in banking is driven by how the institution manages its operations. A retail banking division, a corporate lending arm, and a wealth management unit typically function as separate CGUs because each generates independent cash inflows, has distinct customer bases, and is monitored separately by the board. Within retail banking, the question is whether individual branches form separate CGUs or whether the branch network operates as one CGU. Post-COVID, with digital banking adoption reducing branch dependency, many institutions treat the branch network as a single CGU since customers interact across channels and branch-specific cash inflows can't be isolated. IAS 36.69 supports looking at internal reporting structures for guidance. Auditors should challenge any CGU structure that conveniently avoids impairment by aggregating loss-making branches with profitable digital channels.

The ECB's supervisory expectations (communicated through the SSM) and national regulators like the PRA in the UK have repeatedly flagged banking goodwill impairment as a focus area. Common findings include discount rates that fail to reflect the specific risk of the banking CGU (using a group WACC rather than a divisional cost of equity), cash flow projections that assume regulatory capital requirements remain static when Basel IV implementation will increase capital needs, and inadequate sensitivity analysis. The ECB's 2020 letter to significant institutions specifically noted that banks were not adequately considering COVID-related impairment indicators for goodwill. For mid-market banks, the BaFin in Germany and the DNB in the Netherlands have raised similar concerns about the quality of impairment testing documentation in their inspection findings.

For banking CGUs, input the total carrying amount of non-financial assets allocated to the CGU (goodwill, IT platforms, branch fit-outs, ROU assets for office space). The discount rate should reflect a cost of equity appropriate to the banking sector. Mid-market European banks typically see cost-of-equity figures between 9% and 13%, depending on geographic mix, asset quality, and regulatory buffer requirements. Terminal growth should not exceed long-term nominal GDP growth for the bank's primary market. Cash flow projections should exclude loan-book credit losses (handled under IFRS 9) but include the net interest margin and fee income attributable to the CGU. Run sensitivity on the discount rate and on net interest margin compression scenarios, as even a 20 basis point margin squeeze over five years can eliminate headroom on a large banking CGU.